Category creation and product-led differentiation with Drift's David Cancel
Category creation and product-led differentiation with Drift's David Cancel
David Cancel (00:01):
... focus on an existing category. Ideally, a very big category that's moving slowly and try to segment out parts of it or reimagine parts of it. But if someone were to ask me about category creation, my advice was not to create a category, for sure.
Peep Laja (00:18):
I'm Peep Laja. I don't do fluff. I don't do filler. I don't do emojis. What I do is study winners in B2B SaaS, because I want to know how much is strategy? How much is luck? How do they win? This week David Cancel, CEO at Drift. Since it's founding in 2015 Drift has created the conversation on marketing and sales category. Drift has since become a unicorn. Their team is now over 700 people with over 120 million in revenue and 150,000 customers. In this episode we talk about the true cost of category creation. We hear about innovative marketing strategies to build mental availability at low cost, and we hear about the death of product based differentiation. Let's get into it. So Drift is a poster child for category creation. Was that the play and idea from the get go, like when you started the company?
David Cancel (01:10):
Yes, pretty much from the early days it was part of the idea of starting the company. It was an insane one to think that, you know have the audacity to want to create a category, but the reason that we wanted to create a category was not because we wanted to create one. I didn't know anything about category creation. It had to do with the change that we were trying to point out to people and then identifying to educate people around was so big, so massive that we needed to reframe their thinking from the existing way that they maybe thought about some of the technologies we were talking about. To do that we believed we needed to create a new category. We were the only one obviously when we created the category, but that there would be tens, hundreds, maybe even thousands of companies over time that would be in that category.
David Cancel (01:56):
Again, not because of having anything to do with us, or me, or any of the people involved, but just because that change was happening in the world and we were just the set of people who would give it a name and give it a term.
Peep Laja (02:09):
That change in the world, that insight, did it develop over the years and you all knew about it for a long time, or was that workshopped?
David Cancel (02:19):
It was workshopped in my brain, I would say. For me, I think point of being an entrepreneur and being curious I think about it in terms of not necessarily what I want to create, but really about spotting trends that are happening, mega trends, changes in human behavior. When I looked at them and spent a lot of the time deeply thinking about them, I thought that everything that I had built in the past, which was solely marketing and sales software, it was made for a world that didn't exist anymore. That it was made for a world where the companies were scarce, and because of that they could dictate their sales process and the delivery process, and inflict that on the buyer or the customer, because those customers and buyers had no choice. We were going to a world of infinite supply.
David Cancel (03:08):
In that world that we thought the power would shift to the buyer, to all of us, the individuals. So, that was the observation. It was a pretty quick aha moment and being like, if that's true and if our timing is right, you know the both of those conditions need to be correct for it to work, then everything has to be rethought, re-imagined, and we need to create new categories. We've created one, but there have to be probably multiple categories that describe this and all the software and all the services. More importantly, the human processes that we're used to would all have to change.
Peep Laja (03:47):
Live chat, and even chat bots had been around for a long time, years. It's interesting to note that Drift did not say, we're new or better chat software. They did not compare themselves to what came before, that made all the difference. They talked about the change in the world. People use real time messaging to talk to each other. The idea that you fill out a form on a website and then wait 24 hours to hear back is completely out-dating. They designed a new category. What is category design? Here's an explanation by Christopher Lochhead, the man who wrote a book on it.
Christopher Lochhead (04:19):
Category design is a proactive way of doing what you might call radical differentiation. It's about distinguishing yourself because the most legendary innovators and marketers, they don't want to be compared to what came before them. They want to be known as unique. They want to break or take new ground. Most importantly, they want all others to be compared to them.
Peep Laja (04:47):
There's an argument against category creation versus tapping into preexisting demand, which is that it takes a lot of effort to sell your story, the narrative and you, of course, you guys podcast, the hyper growth conferences, a whole bunch of let's call it customer education or telling the story effort went on.
David Cancel (05:08):
That was nothing to do with the business, right?
Peep Laja (05:10):
No?
David Cancel (05:11):
No, you know we had to educate a whole market that maybe have impacted in the long term and short term the business a little bit, but we had to go beyond that if we were to educate a market. But I think if someone were to ask me about category creation my advice was not to create a category, for sure. I think what you're saying is what I would recommend to them, which is the more powerful thing and the better thing is to really focus on an existing category. Ideally, a very big category that's moving slowly and try to segment out parts of it or reimagine parts of it, but not to create a category. I think that's a crazy thing to do, but because the category again is not about you willing it to existence or educating your way into existence, it's about really a change that it in some ways has nothing to do with you, or your product or service.
Peep Laja (06:02):
So it's difficult because it's too expensive.
David Cancel (06:07):
It's expensive, it's painful. It's almost like starting a company, you will most likely be wrong because not only has the change has to be true, but your timing has to be almost perfect, because you have to be the first one to really spot it and want to create a category around it before anybody else does, and not too early in the cycle before it doesn't matter. So the timing has to be right. When we create a conversational marketing the concepts and ideas, we're ones that probably had been kicked around for a little while. But the thing, the reason that I knew that we could create a category was that we were looking at human changes in behavior around messaging, texting, and chat, and Slack, and Discord, and all these things that we used today.
David Cancel (06:54):
We were looking at the adoption rates and we were looking at the adoption rates globally. Again, not of our software, just of messaging as a category. We saw like, wow, we had gone past the tipping point because we had crossed a point where now no matter your age range or your global location people were choosing messaging as their primary communication method over phone calls and emails and other additional forms. So the timing was perfect. But all those things have to line up perfectly. As you know in terms of starting companies, you usually can't wait around to get timing just perfect, or spend tons of money just sitting there hoping it's right. You don't have that luxury. So for us, we were lucky on the timing side, but it took a lot of energy to spot it and to be ready.
Peep Laja (07:45):
Category creation is an attractive play. Once you're the king of a category you'll get all these amazing benefits, like mind share and mental availability. You're different. You have no direct competition. You escape the trap of better. However, creating categories is no easy feat and most are naive about the millions it takes to pull it off. You need to educate the whole market and make them look at the world with new eyes and understand that now they need you. Instead of tapping into preexisting demand, you create demand from scratch. In the beginning people are not looking for you. Even if you pull it off someone could be a fast follower and out execute you and steal the spotlight. It's something Nick Mehta, the CEO of Gainsight had to be aware of when they set out to create their own category of customer success.
Nick Mehta (08:32):
Category creation, if you think about it, there's a lot of really interesting, attractive things about it. First of all, if you're in a new category, if you're defining a category the right way you often don't have a lot of competitors. That's exciting in the early days. You can define it yourself. You also don't have a lot of noise. I mean, one of the things that's good in category creation is you're not trying to store it out from a thousand different companies. You're trying to create your own space. You also don't have preexisting notions. It's been cool to be able to define what customer success is. The bummer is you don't have any customers because category creators usually start with no customers. If you're doing category creation, and if we're honest, you know it's really hard. There's actually an article that just came out as we were preparing for the talk on how to create a category.
Nick Mehta (09:10):
An article came out and said, don't create a category. So we said, okay, well, we better read this one. The reality is there's a big dark side to creating a category. Not every category creator is the category winner. You can think of a lot of examples throughout history where one company created a category, another fast follower upended that company and took the category. Think of the first computer that wasn't a Mac or a PC. Think of the first MP3 player that wasn't an iPod or think of the first search engine that wasn't Google. It's actually really hard because you're trying to create something that didn't exist before, educate people on the new way to do things. These were the people that didn't reap the category benefit.
Peep Laja (09:48):
If you had to put a price tag on it, to create a category and inform the public at large about the story, and so on, what are we talk about here? 10 million? More?
David Cancel (09:57):
It probably cost us about $10 million, I'd say, that order of magnitude. It was definitely not a million, not $5 million. So, it was greater than five and probably less than 20, if I were to think about it. So, super expensive and we had to have the timing just right to be able to do it. So it's kind of crazy.
Peep Laja (10:17):
So tell me more about strategic thinking at a time. So you wanted to create a category. You had a story to tell. You made all these events and lot of content, what else was going on?
David Cancel (10:28):
My strategy when it came to marketing at this phase of the company in the early days was that in order for us to stand out we were going to have to spend time trying to find and invest in areas that marketers had either were ignoring because they were small and fringe and weird and hard to measure or had fallen out of favor. The reason I was thinking that way was that because we had to disproportionately get amount of mind share in a way that would be as low cost as possible. For a long time digital marketing has taught us to really focus and put an emphasis on the tools and the metrics and the numbers. It's more about operating system and channels and platforms than it is around marketing in the way that I think about it in the old sense.
David Cancel (11:25):
The problem with that is that leads to a kind of thinking where marketers are chasing channels and opportunities that have really good scale, so large audiences, but are really to measure. Because they have to prove that this thing is working or that they're getting traffic or leads or whatever way, or dollars, whatever way that you're measuring it. The problem with that kind of thinking for me is that really marketing and standing out and getting your messages stand out is really about looking for arbitrage opportunities. That's basically opportunity in the system. By the time a channel, let's say like a Google AdWords or Facebook ads, or whatever method that you're using, TikTok or this or that, by the time that it's at scale and easy to measure the arbitrage has been worked out of those systems already. Those early movers have come in and really made a lot of money or really had a large amount of impact.
David Cancel (12:21):
Now everyone is fighting for very low levels of conversion or very low levels of audience accessibility. So, for us, we weren't going to invest in any of those traditional ad based systems or other marketing systems that other people were going to do. We're just going to do non-obvious things. At the time that we thought would help stand us out, create our own conference, which everyone has their own conference at this point, but we were audacious about it. We'll be like, we're going to get 2,000 people to show up for our first one. Then we're going to get 5,000. Then we're going to get 10,000 in our third year. It's like, how are we going to do that? That's for a one day event and we're not going to have any sponsors and we're not going to have any booths, which I hate, like the vendor booths and we're not going to have any of that stuff.
David Cancel (13:06):
It's going to be re-imagining over this whole thing. By doing all of that, which was hard and expensive and a risk, that helped stand out. We were going to write a book. Again, lots of people are writing books now, but this was six years ago. We're going to write a book. We're going to do this.
Peep Laja (13:21):
You were conscious to looking at a different way to do marketing that's not oversaturated yet.
David Cancel (13:26):
Yes, but because of that, super risky, lots of failures there. We did lots of attacks of, we would take over other people's events. We did billboards in weird and strategic ways. That made us seem like we were bigger than we were. We were always punching above our weight in terms of the way that we were able to stand out. We would never join somebody else's event. We would never sponsor another event. We would only do things where we were the center of attention.
Peep Laja (13:56):
How did the product strategy and the marketing strategy evolve as you started growing?
David Cancel (14:00):
I'd say it largely remained the same until we were probably 500 people. I think what changed was really a lot of people started to emulate the stuff that we were doing. So then the arbitrage gets moved out of there, like we were talking. We were pretty early on doing the very beginning of doing LinkedIn takeovers before every company would do that. Where everyone in the company-
Peep Laja (14:26):
What do you mean by LinkedIn takeover?
David Cancel (14:28):
We would dominate feeds. We would get everyone in the company, and as we grew there was a lot of people, to film their own videos announcing something. Just like them on their phone just walking down the street. Then all of a sudden we'd announce something and there'd be hundreds of these videos that get deployed organically. We didn't give anyone a script. We didn't tell them exactly what to say. Any of that, they would do it out of pure excitement. Early on we could take over and dominate LinkedIn for the day or for the couple of days. We would hear from lots and lots of people, many of who we didn't know, or many of the companies that we didn't know of like, "Wow, what is Drift? My entire feed has been taken over by Drift all day."
Peep Laja (15:12):
What David is talking about here I know as the surround sound effect. All the people around you talking about one thing. It could be a book they all read, a podcast episode to listen to, or a tool they used. You can totally engineer this. Here's Alex Birkett talking about the surround sound effect and how Tim Ferriss used it to launch his books.
Alex Birkett (15:33):
You'll notice that when he launches a book he's on all of the podcasts, all of the blog posts. He's doing all the interviews in a period of about two to four weeks. So, at one point you're eventually like, "Dang, I got to check this out. He's everywhere." So it's basically saying, the more people hear about your product from different sources, the more likely they're likely to check you out as somebody seriously to consider. So, as a model, we can look at it like this, with the increase of mentions, you have a linear increase of probability of purchase. So, one mention it's somewhat likely, but not super likely. Then with a ton of mentions, it's very likely you're going to get somebody to buy. So, translated to the software industry this is a fairly example, this is something you might have a conversation with your friends, or you could go to Google, but you say like, "I need a live chat tool." If every source says you should try HubSpot, you're going to be pretty darn likely to try HubSpot.
David Cancel (16:25):
We would do weird stuff around billboards or show up at other people's events, like SaaStr, which was a big event in our category and deploy vans that we had, or take over train cars that people were taking to SaaStr and wrap the entire trains in Drift. We would just look for weird things like that, where it would stand out even though we spent a fraction of what maybe someone had spent in a booth who was sponsoring that event. We would just take over the mind share of those people there. We would always do like, let's say wrap the train, we would always do three things at once. So it was just ping ponging around that person who's attending there of Drift scenes everywhere. The truth is Drift was not everywhere, it might have been in three places, but they were the three places that you were going to cross.
Peep Laja (17:16):
People don't buy things they don't know. To start you need to build awareness that you exist, what someone might use you for, and when. Then you need to create mental availability, which means to be thought of by category buyers in buying situations. Brand building, whether that's flash-mobbing a train car or taking over LinkedIn, doesn't drive immediate purchases, but it creates saliency. So next time in the future when they need a product like yours you might be in their consideration set. Five key things to achieve this. One, avoid silence, continuously trying to reach all buyers of the category and spend as much as you can on advertising. Two, grab attention, and then avoid sameness. Most marketing makes little difference because most marketing is little different. Three, consistently use distinct brand assets. Many leading marketing affecting these thinkers make the case that differentiation is increasingly hard, so focused on distinctiveness first. Distinctiveness is a form of differentiation, owning some visual aspects like DHL owns yellow, red combo. Four, be consistent about your brand. Five, repeat yourself a lot.
Peep Laja (18:24):
When you start to feel sick at how much you've repeated the same message, that's when it's just starting to get through. Marketing idols Les Binet and Peter Field have vividly demonstrated with their work on getting the right balance between brand building and activation or performance marketing. They argue that the most effective advertising is split 60/40 between brand building and activation.
Les Binet (18:46):
It's really important to understand that marketing works in two very different ways over the short and the long term. The short term effects of marketing are easy to understand. We call this sales activation. Sales activation is any marketing activity which is intended to evoke a fairly immediate response from the consumer. For long term growth you need something different, and that's brand building. Brand building needs much broader reach because you need to talk to people not just who are in the market right now, but people who might come to market over the next two to three years. You need to engage them with things that are more humanly relevant, more general, more universal and crucially, you need engage them at the emotional level. The final ingredient is memorability. Remember the point of brand building is to create long term memories that influence sales over the long term.
Les Binet (19:42):
So everything you do needs to be memorable. The optimum of effectiveness tends to be achieved when about 60% of the budget is devoted to long term brand building and about 40% to short term activation. We call this the 60/40 rule. But our latest research shows that rule, that balance, changes depending on category and context. What we are finding in the data is as the digital economy evolves sales activation is becoming much more efficient. What that means is that activation, as it becomes more efficient requires less budget. So, almost counterintuitively the optimum split is shifting away from sales activation towards brand building. To put it simply, in a digital world emotional brand building is more important than it's ever been.
Peep Laja (20:36):
So, you mentioned copycats were coming cloning Drift or parts of it. You knew in advance that this will happen. What did you do in anticipation? How did you maintain the premiumness of Drift, knowing that there's going to be commoditization?
David Cancel (20:54):
Our premise was that all SaaS markets, because of where we were in the cycle would be commoditized and that would include our own. So, even though we were creating a new category, if anything that we thought was correct in any way, then we ourselves would get commoditized pretty quickly. We knew that, we thought that, we believed that. So in order to defend that we disproportionally invested, at least for the size of our company, in building brand. Again, a lot of people now talk about brand building when it comes to B2B, or how do you build a brand, and how do you do that? But there was no one talking about that six years ago. So, we spent a lot of time building brand because we thought we would need a brand, and a global brand at that, in order to stand out the minute we started to get commoditized.
David Cancel (21:46):
We also knew that we had to, from a product standpoint, continue to invest and to create a platform because any single feature, or any single value proposition, would be commoditized quickly. I think that's true for us and it's true for anyone else in the SaaS world today, because we're just ... I published some stuff around this, that I believe that there's these three cycles that markets go through, and that we're in the third cycle when it comes to SaaS software. The first cycle is about pure invention. That was the early days of the commercial internet. So, your defense-ability, back then we would have patents. We would basically be able to hide behind technology because what we were doing was so difficult for people, other people to fit figure out. It was so much work that you could hide behind technology, like a technology moat.
David Cancel (22:34):
Then you go into the second phase, which we were in for a long time, including my previous companies, and that was technology. Everyone knew how to do the technology by that point, it was all public. But what they didn't really understand was the business models that involved. I call that the Henry Ford phase, that's about factory building. So, are you going to build vertical SaaS, horizontal SaaS? Are you going to do freemium product like growth? Are you going to do mid-market, enterprise, or a combination of those threes? We didn't know things like what's your LTB mean? You know like lifetime value, what's LTV to CAC ratios? No one knew what any of that was. Those terms didn't exist. So, it was a mystery back then of how you made the unit economics work. Then how did you segment markets?
David Cancel (23:18):
But now when we started Drift and now where we are talking today, everybody knows that. Everybody knows the business models, what those ratios should look like. Everyone knows how to do technology. So there're no moats around those things. The only moat left in a general sense is to build an affinity with your audience in the consumer world, and then have those people choose you for whatever reason over the competitor.
Peep Laja (23:44):
In 2016, or thereabouts, you famously tweeted that product based differentiation is going away, act accordingly.
David Cancel (23:52):
In SaaS, a thousand percent. It's gone. It doesn't exist. The pandemic has really fast forwarded this idea of global stage. We always talked about that. That was the dream of the internet. Now it's really true. What that means is that you're not competing with companies just around you. You're competing with companies all over the world. They're all on a level playing field. Those companies can copy the business model. They can copy the go to market. They can copy the words and the product and the technology that you've built upon. There's no defense-ability left in those.
Peep Laja (24:32):
In new and emerging categories all the pieces are still up in the air and everything is still possible. Product-led differentiation can be huge. It's how most startups start out, feature based advantages. Product innovation is a way to dramatically accelerate growth, but those are transient advantages not sustaining competitive advantages. You have one to three years to milk your position and then everyone will catch up. So, you need to cook up your next advantage. In mature categories product based differentiation is minimal to not possible. The way to grow is to grab a fundamentally different position in that market or to out-innovate the competition, and ideally both. Sometime last year or maybe 2020 Drift started using revenue acceleration, so moving away from conversational comments as the leading message to revenue acceleration. How did that come about, what we are trying to achieve there?
David Cancel (25:29):
Sure. I would categorize this in a mistake category, so we can talk about what we learned from them. We had created the categories of conversational marketing and conversational sales, and we needed a bridge. We knew that we were always going to head towards this conversational commerce feature, but we had to get the timing just right. It didn't seem like we were getting there just yet, but we needed a way to encapsulate the marketing and sales side into a single story. So, we started to develop and create this idea of a revenue acceleration platform and revenue acceleration being the key benefit that our customers will get from using our products, whether marketing or sales. So, we launched that. I'd categorize that as a mistake because it violated the rules that I mentioned before, which were that category creation had to do with our problem, not a market problem. So, that was a Drift problem, like we needed this bridge. It's took into a no account a market and a market being ready.
David Cancel (26:32):
Those two things having to be true. It was still useful in terms of a frame that we could use to talk about ourselves with customers and differentiate. But was it successful in terms of creating a category? No, and I think it's because we violated those rules.
Peep Laja (26:53):
Most successful B2B companies tap into what people already want and look for. Market demand fuels a lot of the growth. They tap into preexisting demand or solve a previously unsolved big problem. You could even say that an undifferentiated commoditized product can make millions just because people already want it. If a product or service does not cater to existing demand you need to work so much harder, and it's going to take a lot more money. It's interesting that even Drift, a by word for category creation, can slip up. As David said, "Revenue acceleration violated the rules of a strategic narrative." What is a strategic narrative? Here's [Andy Raskin 00:27:33] explaining it
Andy Raskin (27:35):
In general, I think of it as the story in any human's head that guides their actions. In the business context, what every business is looking for, what every leader is looking for is to align everyone around a strategy. So, if we can have that same narrative, that same strategic narrative be embraced by customers, employees, everybody, then it becomes this strategic narrative not just for a person, but for the company, and the whole, and everyone that the company touches.
Peep Laja (28:07):
So, what's going to happen next in this communication messaging?
David Cancel (28:13):
We've just started the beginning of it. This whole conversational world has gone from when we started of being like, one of one, to now there's hundreds of companies in these categories. So, the commoditization is happening. But I think the important thing is that it's helping buyers. I think the first inning that we've been in has really been focused around the messaging part and the conversation part and making it accessible. But the second part which we've been underway and we've been working on really has to do with how do we make this intelligent? Not only accessible to the buyer, which is the most important part, but also accessible to the company. So, how do we organize all of these words and store all of these words that are being said by our customers? How do we make sense of them?
David Cancel (29:02):
How do we take action on them? In both a synchronous way, like a real time way, and then a non real time way. So, after the fact. So, that whole thing is coming now. I think this idea of building companies, having a conversational database, is on its way. So that's what we're focused on now, because for the first time ever companies can not only have those conversations with their customers across all these different channels, but they can also capture that information, and make sense of it, and then build intelligence on that in a way that we've never been able to do before.
Peep Laja (29:38):
You've said that over the next decade messaging will continue to eat the world. In order to survive and compete enterprises need to flip the traditional model. Can you elaborate on that?
David Cancel (29:51):
All the software that we work with and that we all use as customers for a company-centric world, meaning to serve the company first and what happened to you as the customer, or your experience as a customer, were not in consideration. So, we think all of those tools, whether it's across support, marketing, sales, that touch the customer, that interact with the customer, have to be rethought. So, you're going to see a whole new type of sales, marketing, and service suite that will emerge over the next few years. So, that's the part that I'm really excited about, thinking about how we reimagine and recreate all this, is super exciting for me.
Peep Laja (30:32):
What are you banking on today to reach your next milestone?
David Cancel (30:38):
People, it's the only thing you can bank on, is people. That's where I spend all my time trying to figure out having the right people for the right phase. There are people that are the right people and they were the right people for a different phase, or maybe the next phase. So, just getting that right is a constant cycle of learning and changing. There's different phases and there are people who enjoy working in a certain phase or a certain type of company who might not love the next part of the journey, and might being a solo entrepreneur, or might like starting their own business, or joining a smaller business, or joining a bigger business, depending on what they like. So, I think what people want, what we all want as humans are very simple things. There's not much more to it.
Peep Laja (31:34):
So, what are the key factors driving Drift success? One, they timed their category creation strategy perfectly and knew the risks of failure.
David Cancel (31:43):
It's almost like starting a company, you will most likely be wrong because not only has the change has to be true, but your timing has to be almost perfect. Because you have to be the first one to really spot it and want to create a category around it before anybody else does, and not too early in the cycle before it doesn't matter. So, the timing has to be right.
Peep Laja (32:03):
Two, they went left field and marketed in ways no one was doing it at the time. They didn't follow what others were doing, instead did kind of the opposite.
David Cancel (32:12):
We're just going to do non-obvious things at the time that we thought would help stand us out, create our own conference, or we were audacious about it and we'll be like, we're going to get 2,000 people to show up for our first one. By doing all of that, which was hard and expensive and a risk, that helped us stand out.
Peep Laja (32:32):
Three, they understood that product based differentiation is going away and acted accordingly.
David Cancel (32:37):
You are competing with companies all over the world. They're all on a level playing field. Those companies can copy the business model. They can copy the go to market. They can copy the words and the product and the technology that you've built upon. There's no defense-ability left in those. In SaaS, thousand percent, it's gone. It doesn't exist.
Peep Laja (32:58):
Two final takeaways from David about your success.
David Cancel (33:01):
One would be like this maniacal focus on the buyer, which for me, and for many in our world, no one had ever really focused on. The second one would be our team and having that ability to continue to learn and learn from the buyer, learn from our customers and their buyers, and continue to have to reimagine and rethink the way that we build these tools. The way that we market, the way that we go to market, that is hard. That is painful because that involves being okay with being constantly wrong and having to redo your work and rethink and reexamine.
Peep Laja (33:42):
That's how you win. I'm Peep Laja, for more tips, follow me on LinkedIn or Twitter. Thanks for listening.
